A Glance Backward and a Look Ahead
By Timothy Leonhard
6 min read
As we near the end of the first quarter of 2014 and await future developments in the debt markets, it is interesting to take a quick glance back at multifamily finance activity in 2013 and some of the challenges we faced in the industry.
Last year we saw loan production caps placed on Fannie Mae and Freddie Mac and a government shutdown that posed a real challenge for weeks in working with the U.S. Department of Housing and Urban Development/Federal Housing Administration.
In 2013, Fannie Mae’s actual loan production of $28.6 million was below its annual cap of $30.4 billion. Freddie Mac finished under its cap of $25.9 billion with actual volume of $25.8 billion.
Despite the government shutdown, HUD/FHA had another very active year with total multifamily loan production of $17.1 billion in the fiscal year ending September 30, 2013.
2014 Outlook for the GSEs
The big story so far in 2014 is the new legislative proposal by Sens. Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) to overhaul the nation’s housing finance system. The proposal aims to “dismantle” Fannie Mae and Freddie Mac – the big government-sponsored enterprises – in favor of a structure that passes on the “first loss” piece of housing finance (e.g., mortgages) to private capital.
The lengthy bill (over 400 pages) seems supportive of the affordable multifamily housing industry. It appears to express support for the existing Fannie Mae Delegated Underwriting and Servicing (DUS) program, where private sources share the “first loss” position with Fannie Mae, and for structures like Freddie Mac’s Capital Markets Execution (CME) program, where private capital bears the entire first loss position and the government provides a backstop against catastrophic losses.
It seems certain that the federal government will continue to play a role in maintaining liquidity in the multifamily housing industry in whatever legislation is eventually enacted. But with the November 2014 elections approaching, Congress is unlikely to pass any GSE reform legislation this year.
A couple of developments and trends are occurring at HUD/FHA.
With interest rates higher than 12 months ago, the boom in the volume of HUD Section 223(a)(7) loans to refinance existing properties is effectively over. Interest rates remain attractive, however, and permanent and new construction opportunities continue to work their way through the FHA process.
HUD starts its Hub and Field Office restructuring in 2014, beginning this spring with the Fort Worth Hub. Over the next two years, the Department will be cutting the number of multifamily offices around the country from 51 to 12, but has committed to maintaining its processing times.
HUD has also announced policy changes to its FHA pilot program for expediting the processing of Section 223(f) mortgages for low-income housing tax credit projects. Today the pilot has 37 approved MAP lenders and nine participating Hub offices. Twenty transactions have closed and nearly 100 deals have received concept approval.
Some of the more significant policy changes to the pilot program outlined in the recent HUD memo include:
- Removing the 92.5% loan-to-value limit on combined total debt to allow greater subordinate debt sources;
- Allowing a transfer of title to be treated as an acquisition instead of a refinancing where there is an identity of interest between the buyer and seller, thereby allowing a maximum first mortgage LTV of 85% rather than 80%;
- Reducing the completion assurance escrow from 20% to 10%; and,
- Allowing staged pay-in of tax credit equity (including that for the repair reserve), provided at least 20% of the total project equity is paid in at closing.
(For HUD memo on program revisions, go to http://tinyurl.com/psddeuy)
Interest Rate Decline, GSEs
Since December, the Fed has been steadily decreasing its monthly purchases of long-term Treasuries and mortgage-backed securities as it tapers its quantitative easing program. Despite this, the yield on the 10-year Treasury has dropped to around 2.65%-2.70% from above 3% at the beginning of 2014.
While Fannie Mae and Freddie Mac pushed to do a lot of business in the fourth quarter of 2013, their volume has dropped off considerably thus far in 2014, as has FHA loan activity. Fannie Mae and Freddie Mac are currently very aggressive in pricing in hopes of driving volume higher, and each agency is close to a 52-week low in terms of spreads.
FHA multifamily loan rates, on a rollercoaster at the end of last year, have settled down. Demand for all mortgage securities is high but especially for GSE paper with shorter durations than FHA.
Competition in the multifamily mortgage finance space continues to grow, for the benefit of borrowers. Life insurance companies, an array of banks, and a steady growth in the commercial mortgage-backed security space are expanding the multifamily mortgage space, which is putting pressure on loan volumes and the pricing of the GSEs.
Freddie Mac’s VLI Initiative Continues
Freddie Mac has announced a goal to finance more than 40,000 very low-income housing (VLI) units in 2014. VLI is defined as a rental unit with the tenant-paid portion of rent at or below 50% of the area median income calculated rent. Eligible financings are standard acquisitions, acquisition/rehabs, and refinances. Freddie has been very creative in structuring several products in order to land these financings and has provided very attractive loan pricing. If you own or plan to develop a property with at least 50 VLI units, contact your Freddie Mac lender before year-end to discuss your options.
Current FHA, Fannie Mae, Freddie Mac Financing Options
FHA/HUD – Taxable New Construction or Sub Rehab Loan Parameters [Section 221(d)(4)]
| DSCR: 1.11 to 1.20 | LTC: 83% to 90% | Rate: 4.25% (plus MIP) | Loan term: Up to 40 years | Amortization: Up to 40 years |
FHA/HUD – Taxable Acquisition or Refinancing Loan Sizing Parameters [Section 223(a)(7), 223(f)]
| DSCR: 1.15 to 1.20 | LTV: up to 85% | Rate: 3.80% (plus MIP) | Loan term: Up to 35 years | Amortization: Up to 35 years |
Fannie Mae/Freddie Mac Taxable Acquisition or Refinancing Loan Parameters (without new LIHTC)
| DSCR: 1.20 to 1.25 | LTV: 75% to 80% | Rate: 3.80% to 5.85% | Loan term: 5 to 30 years | Amortization: 30 years |
Fannie Mae/Freddie Mac Taxable Acquisition or Refinancing Loan Parameters (with new LIHTC)
| DSCR: 1.15 | LTV: 90% | Rate: 5.35% to 6.00% | Loan term: 15 to 30 years | Amortization: Up to 35 years |
Fannie Mae/Freddie Mac Taxable Adjustable Rate Acquisition or Refinancing Loan Parameters (without new LIHTC)
| DSCR: 1.20 to 1.25 | LTV: 75% to 80% | Rate: 2.50% to 3.75% over 1M LIBOR | Loan term: 5 to 10 years | Amortization: 30 years |
- Note that all rates quotes above assume a full leverage transaction. Transactions with LTV of 70% or less can generate interest rate savings of between 15 bps and 40 bps
Source: Timothy R. Leonhard is the Managing Director of Affordable Housing at Oak Grove Capital, a Fannie Mae, Freddie Mac, and FHA multifamily lender based in Dallas, Texas. Figures as of March 18, 2014. Mr. Leonhard may be reached at 817-310-5800, tleonhard@oakgrovecap.com.
